Australia - Foreign Financial Services Providers - Exemptions To Be Replaced By Requirement For Licence.

Legal News & Analysis - Asia Pacific - Australia - Regulatory & Compliance - Banking & Finance

14 June, 2018


What you need to know


ASIC has released Consultation Paper 301: Foreign financial service providers, in which it outlines its proposal to extend the current FFSP exemptions for 12 months, until 30 September 2019.  This applies to the "limited connection" exemption under former Class Order 03/824, as well as the FFSP exemptions available to providers regulated in offshore countries assessed as having sufficiently equivalent regulation.


ASIC proposes to revoke the existing exemptions and replace them with a new "foreign AFS licence".  This will involve some, but not all, of the obligations of a standard AFS licence.


ASIC proposes an additional 12 month transitional period – from 30 September 2019 to 30 September 2020 – for FFSPs to comply with the requirements of the new foreign AFSL regime.


Background to current exemptions


For many years foreign financial services providers (FFSPs) have relied on ASIC Class Orders which exempt them from the requirement to hold an Australian financial services licence (AFSL) where they provide services to Australian wholesale clients.  In particular:


  • FFSP Class Order exemptions:  Providers regulated in recognised offshore jurisdictions have been able to "passport" into Australia under the FFSP Class Order exemptions – relevant jurisdictions included the UK, USA, Hong Kong, Singapore, Germany, Luxembourg and providers from some other jurisdictions such as France and Brazil had obtained specific relief on similar terms.
  • Limited connection exemption:  The "limited connection" exemption has been traditionally relied on by offshore providers who do not have a place of business in Australia and who are not able to rely on the FFSP Class Order exemptions.


The exemptions were originally scheduled to sunset between 1 October 2016 and 1 April 2017, but in 2016 ASIC extended these exemptions until 27 September 2018.


Proposed changes

Revocation of exemptions and new requirement for a licence


On 1 June 2018, ASIC released Consultation Paper 301: Foreign financial service providers (CP 301) in which it outlined its intentions to repeal the FFSP Class Order exemptions (and any individual relief issued on similar terms).  It also intends to repeal the limited connection exemption.  All of the exemptions would be revoked from 30 September 2019.


In their place, ASIC proposes to implement a modified AFS licensing regime ("foreign AFS licence") for eligible FFSPs that are regulated in sufficiently equivalent jurisdictions.


The proposals reflect a shift in recent years in ASIC's policy towards a greater degree of oversight of the wholesale markets and the sense that wholesale clients require greater regulatory protection under the Australian regulatory regime than the current exemptions provide.  It also reflects a move away from exemptions to licensing (which has been similarly implemented in the recent transition from exempt markets to the licensing of markets).  See our recent Financial Services Update on this.


Who is eligible to apply for an AFS licence?


Regulated providers in the UK, USA, Hong Kong, Singapore, Germany, Luxembourg – ie. those who can presently apply to rely on the FFSP Class Order exemptions – will be able to apply for a foreign AFSL licence.  In addition, Denmark, Sweden, France and Brazil have been assessed as sufficiently equivalent.  FFSPs in all of these jurisdictions will be eligible to apply for a foreign AFS licence.


ASIC has also indicated that entities not currently relying on the FFSP relief (including those relying on the limited connection exemption) may be eligible to apply for a foreign AFS licence if they engage with ASIC about obtaining a sufficient equivalence assessment of their home regulatory regime.


How and when to apply for the new licence?


CP 301 does not provide for an automatic transition for existing providers to the new licence.  Providers will need to apply for the new licence from 1 October 2019.  ASIC is currently updating the process for lodging applications for all AFS licences and will release guidance specific to lodging applications for foreign AFS licences in due course.


Providers from jurisdictions which have not been already assessed as being "sufficiently equivalent" would need to first engage with ASIC and have the assessment conducted.


Provisions that will apply to a foreign AFS licensee


CP 301 proposes that not all licence conditions and regulatory obligations under the Corporations Act and Regulations will apply to a foreign AFS licence, and lists out key obligations which it proposes will apply.  There are also numerous provisions of the Act and Regulations which only apply to licensees, including ASIC enforcement and supervisory provisions.  Appendix 2 of CP 301 includes a comprehensive list of the provisions which ASIC considers would apply to a foreign AFS licensee.  These include, for example:


  • many of the general licensing obligations under section 912A of the Corporations Act.  These include the obligation to provide financial services efficiently, honestly and fairly, the obligation to have in place adequate arrangements for the management of conflicts of interest and to have adequate risk management systems.
  • provisions which support ASIC's supervisory and enforcement activity, such as the obligation to provide a statement under section 912C, suspension and cancellation powers, banning orders and record keeping requirements.
  • conduct provisions governing unconscionable conduct, client order priority, market misconduct and short selling disclosure.


ASIC also proposes to impose the general licence conditions under ASIC Pro Forma 209 (PF 209) to the extent they apply to wholesale clients.  This needs to be considered carefully as there is considerable overlap between PF 209 and obligations under the Corporations Act and Regulations.


The application of these new obligations and provisions will certainly increase the compliance burden of operating a foreign AFS licence, when compared with that which exists under the existing exemptions.


Provisions that will not apply to a foreign AFS licensee


ASIC has identified the provisions and obligations it would not propose to apply to a foreign AFS licensee, on the basis that they are appropriately subject to the supervision and regulation in the home jurisdiction in which sufficient equivalence has been assessed.  These are listed in Appendix 1 of CP 301. Most notably, these include:


  • the client money and property rules under Division 2 and 3 of Part 7.8 of the Corporations Act, where the client money protections in the foreign AFS licensee's home jurisdiction apply to the Australian client’s money.
  • the obligation to maintain the competence to provide financial services (which underpins the responsible managers regime).
  • the requirement to have adequate resources (including financial, technological and human) to provide the financial services.  This means that the financial/capital requirements applicable to licensees under RG166 will not apply.
  • the minimum standards for custodial and depositary services under Class Order 03/1410.


Other considerations


ASIC cost recovery:  ASIC has not provided details in CP 301 as how its new cost recovery process will apply to the new foreign AFS licensing model.


Financial products covered:  ASIC has indicated that it is not minded to consider extending the foreign AFS licence regime to new financial products which have been introduced since the current regime was developed, notably margin lending facilities.


It is time to consider the implications and options for your business


CP 301 has been some time in the making.  ASIC had indicated initially that consultation would occur late in 2017.  Since then, offshore providers have been awaiting the release of CP 301 to properly assess what it means for their activities with Australian customers and counterparties.  There is now a clear path and timetable.  The new licence regime will commence from 1 October 2020, with transition commencing from 1 October 2019.


Accordingly, now is the time to assess the impact that the new licensing regime will have on your business, particularly where you are relying on the FFSP Class Orders or the "limited connection" exemption to service Australian wholesale clients.  It may be that those offshore providers with subsidiaries in Australia may look to restructure their arrangements to utilise the subsidiary and take advantage of other exemptions, rather than apply for a new licence.  Alternatively, other exemptions currently already available under the Corporations Act and Regulations for cross-border business may be utilised (although they are more limiting and may not be sufficient to cover the business contemplated).


ASIC seeks feedback in response to CP 301 by 31 July 2018.  We would be very happy to assist in any submissions to ASIC in response to CP 301, and to discuss with you in more detail the impact of the proposed regime on your business.

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For further information, please contact:


Jonathan Gordon, Partner, Ashurst
[email protected]